Dealing With Market 'Uncertainty'

In the aftermath of the election and Brexit, market participants have raised a familiar question, “There is so much uncertainty. Should we simply sell everything until things become ‘a bit clearer’?” This question isn’t unique to this election or Brexit. The same question was asked in the last five years (and every year before that) in 2011 (downgrade of the US debt rating, contagion in Europe), 2012 (fiscal cliff debate, US Election), 2013 (government shutdown, debt ceiling standoff, QE taper, sequester), 2014 (emerging markets currency crisis, Russia’s annexation of Crimea), and in 2015 (oil prices, Swiss currency cap removal, Chinese currency devaluation).

Uncertainty is always present. In habitual routines of life, people don't think about the ever-present uncertainty until a non-routine event reminds them of it. Uncertainty was present on November 11, 1963, the day before JFK’s assassination. It was present on December 6, 1941, before Pearl Harbor, it was present on October 17, 1987, the day before the stock market fell 23% in a one day, and also on September 10, 2001. It was also present the day before Brexit and before the recent election. All of the factors contributing to these developments were present. Market participants simply didn’t ‘feel’ uncertain as they had assigned a low probability to such events and they had been right in the past. Then a seminal event forced recognition of the fact that we do not truly ever know the future.

Further, it is often an event perceived as negative which reminds people that the future is always unclear. An uncertainty which positively breaks our way doesn’t cause our stomachs to drop. As an example, if GDP and corporate earnings rise terrifically, and stocks go up 40% many people would be happy. But that positive surprise does not invite the same level of gut sinking induced by stocks falling 40%, even though both occurrences deviate from expectations. The human brain seems to be wired this way. Thus, in the aftermath of something seen as negative, feelings of uncertainty are much stronger. In fact, one is least likely to consider ‘uncertainty’ when the going is very good.

Since uncertainty is always present, it is no more (or less) important to consider uncertainty now than at any other time. However, to respond to uncertainty does not require heroic forecasting ability or towering intelligence. In fact, I do not know of any one person who forecasted all of the above events. Even if someone had seen them coming and sold all of their investments, they would have paid a huge opportunity cost as the market today stands higher than at the time of all of those events. So predictions were not only difficult but unnecessary and totally unproductive.

The solution, in my view, is to quit forecasting and to accept that the world is always uncertain. The way to protect oneself is to fight the always-present uncertainty with an always present margin-of safety (buying a $1 for 50 cents rather than 98 cents). Margin of safety is the real protection against uncertainty. A margin of safety serves as a shock absorber for investments. That is not to say that prices of investments couldn’t temporarily go down. But a permanent loss of capital is avoided with a sufficient margin of safety. If we consistently buy with a margin of safety and stick to areas that we understand, then prosperity truly is around the corner.

To be sure, if particular policies of a new administration or new agreements drafted by Britain have any bearing on a particular company, they need to be considered in its valuation. But I’m advocating against a large scale shuffling (buying or selling) of equities based on some feelings regarding the unknown. It is better to simply buy when a security is available with an adequate margin of safety and sell when warranted by valuation or management factors.

I will conclude with an example. In 2006, MasterCard went public and anyone could purchase the stock for a split-adjusted price of $4.6. All of the attractive aspects of MasterCard's business are well known so I won’t repeat them here. Let’s say a prescient investor had seen the great financial crisis coming and avoided purchasing the stock which was reasonably priced in 2006. Such an investor paid a truly huge opportunity cost. Even at its recession lows, MasterCard stock was more than triple its 2006 price. As of this writing, it stands at a whopping 23 times its price in 2006 for a compounded annual total return (including dividends) of about 35.2%, compares to 7.5% for the S&P 500. This is despite all of that ‘uncertainty’ of the intervening 10 years!

Lockheed Martin Odd-Lot Arbitrage

The opportunity

An ‘exchange offer’ is being conducted by Lockheed Martin Corporation (LMT). LMT is offering to exchange shares of its own common stock for shares of LDOS. LDOS is also a publicly traded entity. Thus, an owner of LMT shares can trade in the stock to receive stock of LDOS. (Technically, the exchange is for LMT’s Information Systems & Global Solutions Business, a subsidiary that will merge with LDOS contemporaneously with the exchange offer).

To induce shareholders to accept such an offer, LMT is offering a discount for such an exchange. This discount is partially responsible for the profits achievable in this investment. However, because of this discount, many more shareholders of LMT can be expected to offer their shares for exchange than are being sought by the company. As a result, the company will most likely ‘prorate’ the offer, i.e. only a portion of the stock tendered by the shareholders will be exchanged for LDOS stock and the rest will be returned. However, according to the exchange documents, proration does not apply for owners of 99 shares and below (with all of an individual’s accounts taken together). This is called the ‘odd lot preference’. This is the second important piece of the opportunity.

Profit calculation

Currently, LMT stock trades at $260 and LDOS stock trades at $47.53. LDOS will pay its owners a dividend of $13.64 before the exchange offer. The exchange ratio (i.e. number of LDOS shares to be received per share of LMT) is currently at 8.2136. Hence, a buyer of 99 shares of LMT can expect to profit as follows:

1. Purchase 99 shares of LMT and tender them into the exchange offer by calling the broker (for most brokers, tendering shares cannot be done online; a call has to be made). When calling the broker, one must specify that they desire the ‘odd lot preference’ for their 99 shares.

2. Shortly after the expiration of the offer, the investor will receive 8.2136 shares of LDOS with a current value of about $33.89 per share ($47.53 current price less $13.64 to be paid as a dividend to their shareholders prior to the exchange offer) for each share of LMT. Fractional shares will be rounded down with cash paid in lieu of the rounded amount. Receipt of LDOS shares and cash may take up to 10 business days after the expiration of the exchange offer on 8/15/16.

3. Sell the LDOS shares received. The price of LDOS shares will continue to move during the 10 days that the shares are being exchanged (see Risk #1 below). A profit of ~$1,817 can be made per person, calculated as follows:

99 shares of LMT * (8.2136*33.89 – 260) = ~$1,817, equating to a ~7.1% return in a short time.

The actual profit will vary from the above profit because shares of LDOS will continue to move around while the tendered stock is exchanged and shares of LDOS (along with cash for fractional shares) are delivered back to LMT investors. This can take up to a 10 business days as noted above.

Risks

1. If shares of LDOS fall below $31.66, (about 7% from current levels after subtracting $13.64 for the dividend), the profits may not materialize. Alternatively, if LDOS shares rise, the profits will be larger than indicated. Advanced investors may think about eliminating this possibility by shorting 813 shares of LDOS (99*8.2136, rounded down) which are to be received. Even though such a strategy will ‘lock in’ the profits, the $13.64 dividend paid by LDOS per share will complicate this short significantly. This shorting strategy is being used by many arbitrageurs and their shorting appears to be responsible for the recent decline in the price of LDOS, which I consider temporary. If engaging in a short of LDOS shares to ‘lock in’ profits, I urge caution in reviewing cash and collateral requirements with your broker.

For those looking for even more details, the prospectus and other documents are available here:

http://edocumentview.com/LockheedMartinExchange/ 

Disclosure and disclaimer:

A partnership I manage owns shares of LMT. Under no circumstances should this communication be construed as investment advice or a recommendation to buy or sell any security, whether expressed or implied. Factual statements are believed to be truthful and reliable, but are not warranted against errors or omissions. Please do your own due diligence prior to investing.

Baxter Odd-Lot Arbitrage

Taking advantage of the ongoing exchange offer by Baxter (BAX), here's a quick way to make $480. The exchange ratio has been fixed at 1.1591 shares of BXLT for each share of BAX. Purchase 99 shares of BAX and tender them into the exchange offer. Upon completion of the offer, the investor will receive 1.1591 shares of BXLT currently trading at about $43 per share. Fractional shares will be rounded down with cash paid in lieu of the rounded amount. Shares of BAX were trading at $45 at the time of this writing. Thus, a quick profit of $480 can be made:

99 * (43*1.1591 - 45) = $479.

In this particular offer, the broker needs to be instructed to check the odd-lot preferential treatment box whereas in other offers, it's sometimes an automatic election. The offer carries the provisions for guaranteed delivery procedures. Thus, unsettled stock may be tendered in most cases.

Please note:

Under NO circumstances should any content or communication here be construed as investment advice or a recommendation to buy or sell any security, whether expressed or implied. Factual statements are believed to be truthful and reliable, but are not warranted against errors or omissions. PLEASE do your own due diligence prior to investing.

Seritage Growth Properties

I made an investment in Seritage Growth Properties (SRG) at a prices averaging $39.84 per share as the earnings of the company are poised to increase substantially over the coming years. Further, being a REIT, such earnings will be distributed to owners.

SRG was formed as a spin-off (effected via a rights offering) from Sears Holdings (SHLD) in July 2015. As a part of the transaction, SRG purchased 235 properties from SHLD and leased 224 of them back to SHLD at rents approximating $4 per square foot under a Master Lease. The remaining 11 have non-SHLD tenants. Further, SRG purchased from SHLD its 50% interests in three JVs (GGP-JV, MAC-JV, SPG-JV) for $430 mm. These JVs represent 31 properties and are managed by General Growth Properties, Macerich, and Simon Properties Group respectively. The total purchase price paid by SRG was $2.7 billion.

The 235 wholly owned properties are divided into Type I, Type II, and Type III properties. The Master Lease allows for SRG to “recapture” (i.e. move Sears out) up to 100% of the space in Type I properties, 50% of the space in Type II properties, and 100% of any Sears Auto Centers. SRG can then re-develop and lease them to new tenants at higher rent. This is the expected source of increased earnings.

The JV Master Lease is similar to the SRG Master Lease and allows the JVs to re-capture up to 50% of the space in the stores and all of the space in the auto centers.

Current lease income:

Under the Master Lease, SHLD will pay annual rent of about $140 million as of the time of separation and further reduced as spaces are re-captured. Additionally, third party tenants that had already signed and begun their leases at separation were paying an additional $16 million, giving a total of $156 million in initial cash rent. Against this are expenses of approximately $20 million for G&A and $58 million for interest, giving a net cash inflow of $78 million before considering the JVs.

Opportunity to increase rents:

The properties currently occupied by SHLD are either freestanding locations or mall anchors. The redevelopment of each property will take a different form. But the increase in earnings generated from re-tenanting should follow the formula: new rent less old rent and development costs. Development costs will most likely be borrowed and, hence, the development expense will show up as interest expense and principal repayments. The leases are similar to triple-net leases and while G&A will go up, large increases won’t be needed.

Third party in-place rent averaged about $11-12 per square foot at inception. It’s impossible at this point to know what the average per square foot rent on re-tenanting will be as that depends on the type of tenant, size of the space, etc. However, it’s easy to see that the spread can be quite substantially simply because $4 per square foot paid by SHLD is too low. Surveys by CBRE and 10-Ks of other REITs routinely show anchor rents in Class A malls of $12-25 and even in Class B malls of $9-12 per square foot. In fact, the leases signed with the three JVs referenced above have an average rent of $8-10 per square foot and the JVs expect to redevelop the space to revise the rent further upward. Also, free-standing spaces (e.g. Thousand Oaks, CA) and mall spaces (e.g. King of Prussia Mall, PA) are being divided to house multiple tenants which allows for higher rent per square foot as smaller spaces garner higher per square foot rent.

With the advent of online shopping, retail space has come under pressure as corroborated by Macy’s and other retailers shutting down stores to reduce their physical footprint. However, it doesn’t appear to be as bad as the news might suggest. Retailers appear to need some physical presence combined with a substantial online presence. This is demonstrated by online-only retailers such as Warby Parker, Bonobos, and even Amazon opening up physical stores as physical presence remains a need for brand building, accepting returns, facilitating quick deliveries for online orders, and trying out new products. However, the space needed for these purposes has increased demand for the best properties and away from the mediocre properties, which has been reflected in the results shown by Class A mall owners v/s Class B & C owners. Class A rents continue to move up, further helped by a lack of development of new malls since the Great Recession, and the physically impossibility of building new retail space in some densely populated high traffic areas (for e.g. Santa Monica, Beverly Hills, etc.). What this means for our analysis is that we should bifurcate and analyze “good” and “okay” properties separately. A lot of the good space is located in Type I properties, though Type II also has many good properties.

There is approximately 3.9 million square feet of Type I space. In the recent quarter filed by the company, new leases were signed predominantly in Type I space (Braintree, MA, Memphis, TN Honolulu, HI) and a one auto center (San Antonio, TX) in a Type II property. The rent achieved on the leases signed for this space were approximately $30 compared to $6 that the company was getting from SHLD, i.e. a “lease spread” of $24. Prior to the separation, leases were also signed for the anchor pad at King of Prussia mall, which was re-tenanted with Dick’s Sporting Goods and Primark achieving a rent of $25 per square foot. The fact that the company chose to start redeveloping the Type I and auto centers first supports our thesis that these contain more “spread” than the others. If the 3.9 million of Type I space garners a rent of $25 (i.e. $21 lease spread), the top line growth from this source alone could be $82 million.

Further, auto-centers are particularly attractive as they can be redeveloped for use by small retailers, fast-food chains, and such other companies. The Sears Auto Centers are located in highly trafficked areas of the shopping centers/mall, with easy street access which also makes it attractive to chains operating drive through outlets. In retail, jewelers and fast-food/cast-casual (whether inline or free-standing) pay some of the highest per square foot rents as they have high per-square foot sales compared to, say, apparel retailers. Current leases for auto-centers have been executed with Jared’s Jeweler, Outback Steakhouse, Chipotle, Smash burger, Applebees, REI, etc. The auto-center in Carson, CA was signed up at leases averaging $45 per square foot. It’s not known separately what rent SHLD pays for the auto centers, but if the payment is comparable to other spaces around $4, this equates to a spread of $41 for the Carson location. Auto centers like the one in King of Prussia mall will provide higher rents but some others may provide lower rents. Even if average rents of $40 (i.e. spread of $36) were achieved on 3.6 million of auto-center space, total top line contribution would be $130 million.

Development potential also resides in Type II properties. Type II properties are a mix of malls with some great properties (such as Westfield UTC, San Diego), many mediocre properties, and some terrible properties. How much SRG will earn from these properties is unclear as some of them may have to be sold, and others could be re-tenanted and the rent would depend on the type of redevelopment and tenant. The space is a mix of mall and free-standing space. If one were to conservatively estimate that if even 70% of the 50% “re-capturable” square footage of 13.8 million square feet (50% times 36.6 million total less 3.9 million Type I, 1.5 million Type III, and 3.6 million auto center) could be re-tenanted at $12 per square foot (which would be in line with Class B space and below SRG’s disclosed leases), additional top line rent would be $80 million.

At the time of the separation, the company had noted that the rental income would increase $15 mm each year for the first two years following the separation due to re-tenanting for SNO leases as of that time. The company appears well on its way to achieving this, based on recent disclosures.
Living in Los Angeles, I have had the opportunity to visit some of the Southern California properties owned by SRG to check them out and I’m satisfied that the redevelopment plans as envisioned by the company are reasonable.

Cost of redevelopment:

Retail redevelopment costs can range anywhere from $100 per square-foot for smaller projects to $300 per square-foot for a complete rebuild and even up to $1000 per square foot in areas where construction is more difficult and expensive. Generally it tends to be $100 to $250 per square foot, though construction costs have gone up recently. For SRG’s completed and announced projects, the costs have run around $150 per square foot for the high-density areas. They could be lesser in other areas, particularly with larger free-standing stores. Assuming a cost of $150 per square foot for the auto centers and Type I properties and $100 per square foot for the Type II properties, for the 21.3 mm square feet of space noted above, this would equate to a total cost of $2.1 billion, though this outlay won’t be required all at once. Currently SRG has $250 million of liquidity, which should suffice for the near term development projects without needing equity issuances. As projects are delivered and cash flow increases, a portion of the projects could be funded internally and pre-leased projects could be funded with development loans. Though it’s difficult to say how much equity issuance will be needed in the future, the controlling shareholders and management own enough stock that they could be expected to be parsimonious in this regard.

Equity Accounted JVs:

The three JVs taken together control about 5.4 mm square feet of space, of which 5.1 mm is leased to SHLD. The JV malls are of high quality, evidenced by high average sales per square foot for these properties in their in-line stores. The JV partners manage the operations of the JV and are owed a management fee approximating 4% of rental revenues. The SHLD rent, at inception, was set at $42.3 mm per year or $8.2 per square foot and could be re-tenanted at $12 to $25 per square foot. As an example, the King of Prussia Mall which does greater than $700 per square foot in sales was re-tenanted with a Primark and Dick’s Sporting Goods yielding a rent of $25 per square foot. There are several malls in the JVs that achieve a comparable or higher level of sales per square foot and, thus, could obtain similar rental levels. Using $25 per square foot (same as our Type I property assumption), the lease spread would be $17 per square foot, giving a top line addition of $43.4 mm. Thus total JV rental revenue (net of reimbursable property operating expenses) is calculated as $42.3 million + Current Third Party Rent (not known precisely but probably approximates $4mm) + $43.4 million = $89.7 million.

Against this are expenses of 4% for management fee, or $3.6 million, and any redevelopment costs. At $150 per square foot at 2.55 million square feet, the cost is about $382.5 million. Currently the JVs do not have any debt at all and, thus, could certainly support a portion of this amount as development gets going. Interest at 5.25% on $382.5 million of debt equals $20 million, giving total income of about $66 million. Half of this, or $33 million, would be attributable to SRG.

Valuation:

Adding it all together, a fully-developed SRG may look something like below. Note that exact development of events is unknown but reasonable assumptions show significant preponderance of value over price. The company may take a different route which may realize more value, but I believe the below serves as at least the lower bound for valuation.

Additionally, two sources of value are potentially present but are not included in calculated value:

Outside of the current GLA, SRG owns very significant land and outparcels which can be redeveloped for non-retail use, including mixed-use properties. The company has noted this possibility in its prospectus and entitlement for one project is underway, though this will be much further down the road than some of the retail re-tenanting opportunities. The total acreage owned (including the GLA noted above) is approximately 3000 acres. Excluding such GLA, the acreage would equal about 2100 acres, though some of this is used for parking, etc. and may not be available for redevelopment. Some (but certainly not all) of this acreage is located in very desirable areas. Evidence was provided by the sale of a 5.3 acre Sears property (not sold by SRG but by another owner) in Hollywood for $43.5 million, or $8.2 million per acre. Large land holdings like the 34 acres in Braintree, MA could be worth significant amount, but exactly how much is difficult to say as a lot depends on zoning, financing environment, timing of sale, etc. It’s not easy to move large real estate lots quickly. No value is being ascribed to this in our valuation, but perhaps there’s potential, particularly in acreage around free-standing stores. Such value could range from ‘a little’ to ‘a lot’.

SHLD has the option to “put” to SRG any stores that have rents higher than EBITDAR, subject to the limitation that rent under the master lease may not be reduced by more than 20% in any given year. As of the separation date, 59 stores qualified for the put. While a large number of stores coming in at once is certainly a risk, this may also allow SRG to obtain more real estate than could otherwise be obtained under the 50% re-capture provision of Type II stores. Thus, more space could be re-tenanted at a higher rent, if and when appropriate.

Additionally, I have not shown rent escalation above which would add some (but not a lot) annual income.

Risks:

SHLD bankruptcy: SHLD has been performing poorly for some time. However, near term maturities have been handled and a bankruptcy doesn’t look plausible in 2016 and perhaps even 2017, though it cannot be completely ruled out. SHLD has further assets to divest to keep the retail operation afloat for longer as has been done in the last few years.

Bankruptcy of SHLD and a rejection of the Master Lease would certainly have a very adverse near-term effect on SRG as it relies on SHLD for a majority of its income. However, being a unitary lease, SHLD is unlikely to reject it under Chapter 11 as it would need the leased properties to re-organize as a retailer. The below-market rent of the leases is in fact a benefit to SHLD which it may find worth keeping in a reorganization. A re-organization may even benefit SRG in the long run as more properties become available quickly without having to pay the amounts due on providing re-capture notices.

While a SHLD bankruptcy or the exercise of the property put by SHLD would subject SRG to some trouble in the short run, third party leases are being signed at a rapid rate and it’s probably that within the next few years, third party rent income should be enough to pay the operating expenses of SRG.

Fraudulent Conveyance: If SHLD were to file bankruptcy, the court may deem the SRG separation a fraudulent conveyance (similar to the Tronox/Kerr-McGee/Anadarko litigation) and have the transaction reversed. In this case, theoretically, the shareholders would get value equaling $29.58 per share. Practically speaking, SHLD will likely not pay this amount to buy SRG back. Rather, SRG would owe some monetary value to SHLD’s bankruptcy estate. Given a purchase price of $39.84, the potential loss under this scenario can be approximated as $10.26.

Competing space available: Recently several retailers, including Macy’s, have announced store closures and their troubles may flood the market with more retail space which competes with SRG pushing down leasing rates.

Please note:

Under NO circumstances should any content or communication here be construed as investment advice or a recommendation to buy or sell any security, whether expressed or implied. Factual statements are believed to be truthful and reliable, but are not warranted against errors or omissions. PLEASE do your own due diligence prior to investing.

FUR - Another Liquidation

Winthrop Realty (FUR) is a liquidation, currently trading at 12.70 which could yield a return of 12.5% to 33% within one or two years with safety of principal. This return is calculated based on total value to be realized in liquidation. As liquidating distributions will be made 'on-the-go’, rather than at the end, the IRR realized would be higher.

The plan of liquidation was approved on 8/5/14. To obtain the desired tax treatment, the company must finish its liquidation within 24 month, by August 2016 or convert to a non-tradable liquidating trust at that time. The deadline is unlikely to be met and the shares will most likely be converted into a non-tradable trust in August.

The current liquidation estimate is $14.17 per share. It is $15.17 per share according to latest 10-Q filed for the period ended 9/30/15 (https://www.sec.gov/Archives/edgar/data/37008/000119312515369963/d86799d10q.htm). Then one has to subtract $1 that has been paid in distribution since the 10-Q was filed. I don’t find a reason not to trust this estimate given that management has a good history of liquidating assets in excess of estimates as can be seen in the 3Q15 supplement on the company’s website (http://files.shareholder.com/downloads/FUR/1344024586x0x859175/B043636B-6876-4483-930B-0BCABFFAFFF2/FUR_Q3_2015_Supplement_10.28.15.pdf).

Further to this $14.17 estimate, the company has recently collected $5 million as a non-refundable deposit on a property sale which was then cancelled. The deposit does not have to be returned and the company’s 83.7% ownership in the asset will entitle it to $4.185 million, or $0.11 per share. So added together, the “stated distribution” is about $14.28. Based on a current purchase price of $12.7, this indicates a return of 12.5%, if management meets its estimated sales prices. As noted, Management has a history of exceeding these prices. Moreover, the advisory arrangement which gives management 20% of any excess over the thresholds serves to incentivize management to maximize value.

Times Square Property

The company has an interest in a ‘crown jewel’ property at 20 Times Square (http://20timessquare.com/). The property consists of a 452-room hotel, 18,000 square feet of LED signage, and 76,000 square feet of retail space and 40,000 square feet of entertainment space. The floor plans can be seen on the property’s website.

The company has currently valued the property at $1.17 billion. Their $1.17 billion appraisal seems reasonable seeing as there are development loans signed which, when fully funded as construction progresses, will total to $800 million. So that’s an implied LTV of 69%, which seems reasonable in the post-recession period for a development loan. The company only owns a portion of the equity in the development venture. As stated in the company’s recent 8-K, the equity value attributable to this asset for financial statement purposes is approximately $169 million ($4.64 per share). Under the operating agreement for this asset, the Trust will be entitled to 15.28% of any additional property value in excess of $1.182 billion.

I believe this property could contribute anywhere from $0.08 to $2.56 per share in addition to the current estimate of $4.64 per share.

Comparables/metrics used in valuation:

The comparable for the hotel is the recently sold 468-room Double Tree Guest Suites Times Square, which is directly across from the property in question. The double tree sold for a gross sale price of $540 million, on $1.15 mm per room. This deal was done in December 2015, so quite current. In fact, that buyer (Maefield) is FURs partner in the 701 7^th Avenue project.

The retail signage comparable is the billboard at 719 7^th Avenue developed by Vornado.

The retail leasing rates are from various NY retail leasing reports from CBRE and JLL as well as knowledge of the CBRE lease marketing.

The entertainment space comparables are tough to find and I simply assigned a per-square foot lease of $150 at the high end, though, this is likely to be conservative given that the rate I used is equivalent to the ‘Concourse 2’ retail rate even though the entertainment area is much better positioned within the property. Cap Rates used are 4.35% to 5.35% from high to low, based on Cap Rate surveys of the major firms. For the entertainment space, I used 6% on the low and 5% on the high end.

Low multipliers are 90% of high multipliers and NOI margins used are 65% for signage and 50% for everything else.

Valuation:

So the most optimistic case calls for 33% return whereas a simply achieving the stated targets, which management has shown an ability to do, would yield 12.5%. This does not consider any upside from being able to sell other non-times square properties for more than current appraisals, which management has shown the ability to do.

Risks:

1.       Timing: If management takes longer than planned to liquidate, realized returns could be lower. However, Management has thus far done a good job of staying on schedule.

2.       A real estate recession: In the short-run, considering supply and demand factors in FUR’s markets, this appears to be a remote possibility only. A cap-rate expansion is more likely if rates were to increase significantly. This is particularly true in NYC where hotel supply has been at peak levels. I have attempted to use reasonable cap rates at the low-end to allow for this. Further, trophy properties such at 701 7^th Avenue are not 100% correlated to cap rates as can be seen from recent NYC trophy-property sales. So while cap rates could be higher, they could just as well be lower and I believe I have used rates that are reasonable.

3.       Opportunity Cost: Is it wise to earn 12.5% when potentially better investments are out there? Given the relative safety of principal, the reducing amount of capital invested as distributions are paid, and other options available in the market, I believe FUR represents a good investment for the ‘cash’ portion of any allocation investors might have. Should other securities fall a lot and other investments become more attractive, liquidations like FUR generally fall less (as has been observed for our two liquidations – FUR & GYRO – in the market decline of January 2016). At that time, the buyer can switch from FUR into other investments, if needed. But if this were not to happen, a 12.5% to 33% return on a cash allocation within 12-18 months would be an acceptable rate in my view.

Please note:

Under NO circumstances should any content or communication here be construed as
investment advice or a recommendation to buy or sell any security, whether expressed or
implied. Factual statements are believed to be truthful and reliable, but are not warranted
against errors or omissions. PLEASE do your own due diligence prior to investing.

Disclosure: Long FUR